Behavioral Economics Essay

Introduction Behavioral Economics is an extremely important field of psychology; it seeks to expand the current tools that researchers use in economics and finance to introduce new models of human behavior that are adequately founded in psychological research. The Behavior Economics is crucial in business decision making process. The knowledge in Business and Financial Literacy is very important for their direct application to Business and Consulting Psychology. Understanding Financial Management which includes: profit & loss, cash flow, balance sheets, ratios, ROI, working capital, budgeting, financial planning, and corporate finance; and Business Management that includes: business strategy, strategic market management, micro-economic analysis, sustainable competitive advantage, strategic positioning, diversification, acquisitions, mergers, and technology management, will allow the consultant to help businesses increase their profits and improve their company’s culture. Business Management and Strategy Business Strategy is a management plan of action that an organization put in place in order to achieve a particular goal or a set of goals and objectives, this strategy can help the organization differentiate itself from its competitors. In order for a company to differentiate itself from their competitors, they need to successfully implement a strategy that will determine the market that the business will compete, the investment needed, the strategies required to compete in that specific market and the strategic resources or competencies that underline the strategy by providing a important sustainable competitive advantage (SCA) (Aaker, 2001). Budgeting and Financial Planning There are many vital managerial tools that assist in managing a successful business. Budgeting is the most common and widely used tool for planning and control; it is essentially a guideline that focuses on spending, it can breaks down all the business’ expenses in different categories, per example, utilities, payroll, taxes, materials, equipment, etc, also all the income that the business expect to receive in a certain period of time, this period of time is usually yearly, monthly or sometimes weekly. Once the manager has all the estimated income and expenses for that period of time, the budget will start to take shape. The budget goal is to subtract all the expected expenses from the expected income for the same period and still have a positive cash balance. A budget should not be a rigid and fixed tool from which you may never deviate (Wood, 2012). The Financial Planning focuses on allocating resources efficiently, specifically achieving long range goals. In summary, while the budget focuses on the daily functioning of the organization, the future depends greatly on the financial planning which in turn relies on budgeting in order to be effective. Corporate Finance The Corporate Finance addresses how organizations face their financial obligation, to intelligently invest their resources, achieve the correct combination of financing to fund their investments and return a profit to the investors; hence achieving value maximization. When a company invests in a project or multiple projects, this project will generate expenses and will create revenue for the company, but what is a project? Project is any activity that generates a series of cash flows for the organization. The company uses the revenue in excess of expenses to fund new projects, improve existing projects or pay its investors (Spiegel, 2000). Per example, applying a low-cost strategy, businesses can remove all frills and extras from its products and services (Aaker, 2001), making the organization more competitive and profitable. Financial ratios The Financial Ratios are practical indicators of a company’s financial and performance situation. The most important indicator of a business performance is profits. Profits provide the basis for the internally or externally generated capital that the organization needs to follow its growth strategies, to replace out of dated plants and equipments, and to absorb market risk (Aaker, 2001). But how can we measure the profitability of an organization? The most basic and important tool to measure profitability is the Return on Assets, which is calculated by dividing the organization’s profits by the assets involved (Aaker, 2001). The ROI measures how much profit the organization can produce with the capital that is available to them (Gitman, 2009). The company’s goal is to increase the ROI, because higher the ROI, the better. That’s why the ROA is so important for managers, investors and other business that may sell to this company. Strategic Marketing The Strategic Marketing includes creating a marketing plan that describes in detail the marketing mix, segmentation, and branding decisions. Branding is not just to increase sales in one product, but to any product that is associated with that brand. That’s why engagement matters; it pulls customers back into the business and at the end of the day leads to repeat sales (Goodman, 2012). There are many different ways to use branding to support the organizations growth strategy, but for each specific growth strategy that are different approaches that can be used in order to achieve success (Aaker, 2001). Sustainable Branding will also increase customer loyalty where customers will recognize the quality of the product or service every time that they see the brand (Aaker, 2001). Downsizing, Mergers & Acquisitions Mergers & Acquisitions essentially have the same features where the end result is one company where two existed. As stated by Shook & Roth (2010), during a merger and acquisition process, the organization will try to eliminate any overlapping positions and this process can cause downsize, which is the process of restructuring a organization in a way that brings reduction of a part of the company’s employees. If the M&A is successful, the new company will be more cost effective, efficient and mostly important, profitable (Holden, 2010). Mergers and acquisitions can also reduce significantly the competition and the overhead for both companies (Holden, 2010). Consultants can be key facilitators of a smooth transition (during a M&A) by ensuring that there is sufficient understanding and ‘buy-in’ at the leadership level about the costs of not addressing the culture issue early in the M&A process. There is plenty of empirical evidence suggesting the failure rate of M&A’s due to issues with the unsuccessful meshing of a newly merged corporate culture. During an M&A, cultural change often represents the ‘soft side’ of the transaction. Everybody agrees about its importance but it seems too frequently to take a rear seat in the stated price tag synergies to be accomplished, as well as, how the new administrative track that needs to be quickly put in practice. Conclusion The main goal of a business consultant is to provide a professional or/and expert advice, but in order to do it, it’s vital that consultants understand the need to become an expert on their client’s business and industry; it’s also very important that consultants understand the need to communicate in their clients’ language. Also, in order to be effective, the consultant should be able to use motivation to trigger the organization members to change their behavior in order to achieve the organization goals (Fernandez-Huerga, 2008). As a consultant, my goal is to support the company’s administration to resolve management, manufacturing, marketing, or other issues by providing: * Focus and direction, * Expert analytical skills, * Objectivity, and * Knowledge and experience obtained from earlier assignments Also as a professional I will help clients to define a project’s goal and capacity, and together with administration prepare a comprehensive proposal to document how the project will be implemented in order to achieve the desired objectives and steps along the way. Also I will make sure that the proposed changes are approved by the client before put in practice. Another very important issue is to maintain confidentiality during and after the assignment. My ultimate goal as a consultant will be to develop a concept of a sustainable competitive advantage (SCA) and to neutralize the SCAs of competitors (Aaker, 2001). Using the Game Strategy, which is a study of strategic decision making, the consultant will be able to develop important insights concerning the strategy and how it should be addressed providing a rational choices for businesses dilemmas (Wood, 2012). References Aaker, D. (2001). Developing business strategies (6th Ed.). New York, NY: John Wiley and Sons, Inc. Berman, K. & Knight, J. (2008). Financial Intelligence For HR Professionals. Boston, MA: Harvard Business Press. Fernandez-Huerga, E. (Sep2008). The economic behavior of human beings: The institutional/post-Keynesian model. Journal of Economic Issues (Association for Evolutionary Economics, 42 (3), 709-726. Gitman, L. J. (2009). Principles of managerial finance. (12 ed.). Boston, MA: Addison-Wesley. Goodman, G. F. (2012). Engagement marketing: How small business wins in a socially connected world. Hoboken, NJ: John Wiley & Sons. Holden , P. (2010). Economies of scale: a quick explanation [Video file]. Retrieved from YouTube website: http://www.youtube.com/watch?v=AZshS761WsE Marks, M. (2003). Surviving MADness. HR Magazine, 48(6), 86. Marks, M., & Mirvis, P. H. (2012). Applying OD to Make Mergers and Acquisitions Work. OD Practitioner, 44(3), 5-12. Shook, L., & Roth, G. (2010). Downsiz ings, mergers, and acquisition: Perspectives of human resources development practitioners. Journal of European Industrial Training 32(2), 135-153. Spiegel, M. (2000). Principles of corporate finance. Unpublished raw data, Yale School of Management, Retrieved from http://som.yale.edu/~spiegel/intro/sampread.pdf Teamtechnology.co.uk. (n.d.). Retrieved from http://www.teamtechnology.co.uk/changemanagement.html Wickramasignhe, V. & Karunaratne, C. (Mar2009). People management in mergers and acquisitions in Sri Lanka: employee perception. Journal of Human Resource Management, 20 (3), 694-715. Wood, N. (2012). Behavioral Economics. [PowerPoint slides]. Retrieved from http://www.nancywood.org/Business/Behavior/Behavioral.pptx